Finding the “Sweet Spot” for Federal Oil & Gas Leasing Reform

Internalizing the social cost of carbon in federal oil and gas leases would reduce carbon emissions and raise federal revenue.

Date

Sept. 16, 2020

News Type

Press Release

Fossil fuels produced on federal lands are responsible for roughly 25 percent of the United States's annual CO2 emissions. As oil and gas production on public lands garners growing attention, policymakers are increasingly considering reforms to the federal leasing program.

A new working paper from Resources for the Future (RFF) examines proposed policies to reform the federal oil and gas leasing program. Study author and RFF Fellow Brian Prest modeled three policies with differing emphases on reducing carbon emissions:

  • Moratoriums, which prohibit new oil and gas drilling leases on federal lands
  • Increased royalty rates, which raise the percentage of revenue firms must pay the federal government (this study models royalty rates of 18.75 and 25 percent)
  • Carbon adders, which internalize the social cost of carbon (for this study, assuming $50/ton of CO2) in the form of fees

According to Prest’s analysis, a moratorium—like the one endorsed by presidential candidate Joe Biden and other policymakers—would result in the highest reduction in greenhouse gas emissions. However, Prest finds, introducing one would lose $5–6 billion in government revenue each year. On the other hand, increased royalty rates would bring in $1–3 billion in additional revenue for the government but would lead to relatively insignificant reductions in emissions.

But there is a middle ground—Prest’s model shows that carbon adders would achieve roughly two-thirds of the emissions reductions of a moratorium while also raising about $7 billion in additional government revenue per year. This revenue could be used for energy research and development, tax reductions, or aid for communities dependent on declining fossil fuel industries.

“While there is little momentum in Congress for an economy-wide carbon price, a carbon adder on federal oil and gas production is a step in that direction—and could arguably be implemented by executive order,” Prest says. “But the downside to all of these policies is the possibility of emissions ‘leakage,’ in which reduced oil and gas production on federal lands shifts to non-federal and foreign producers.”

None of these policies alone would achieve the House Select Committee on the Climate Crisis’s goal of net-zero emissions from oil and gas on federal lands by 2040. The paper states that in order to meet these ambitious goals, the government will need to modify existing leases and/or invest in carbon sequestration and renewable energy on federal lands.

“The public discussion of federal leasing policy has been so focused on a moratorium that carbon adders have gotten the short stick,” Prest says. “Carbon adders could simultaneously make progress towards cutting carbon emissions and raising revenues, but we must keep an eye on leakage concerns.”

To learn more about these findings, read the paper, “Supply-Side Reforms to Oil and Gas Production on Federal Lands: Modeling the Implications for Climate Emissions, Revenues, and Production Shifts” by RFF Fellow Brian Prest.

Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.

Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.

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